The Flow of Money
Major Currencies Rule Forex
Regarding fundamental analysis, the big picture starts with the major currenciesthat make the world go round.
You already know that in forex there are 8 most commonly traded world currencies. Why not more? Because these are the currencies of the most economically and politically stable economies in the world, like the USA, Japan, and Switzerland.
Thanks to their overall liquidity, the most actively traded currency pairs are the following:
Economic and political events taking place in the countries, whose currency is in demand, influence the upward or downward price movements of that particular currency. This is why you shouldn’t only concentrate on a single currency, but follow world events and keep an eye on the global flow of money.
Imagine a Chinese-European scenario. China wants to import products from Germany and Belgium. As China can’t use their local currency (yuan) in the eurozone, they must first buy the euro to be able to pay for these products. This will, of course, create greater demand for the euro.
At the same time, there may be a Chinese tycoon, who builds up a factory in Germany, and even starts investing long-term in the German stock market. To do so he must purchase euro. This also adds to the large euro inflow into the German economy, and increases the demand for the euro even more. Since every price in the free economy depends on supply and demand, the euro will rise against yuan.
The more the German, Belgian, and Dutch economies grow, eventually the bigger inflation gets. This means that their products get more expensive. As a result, the European Central Bank will raise interest rates to keep inflation under control. Because of the growing interest rates, more and more investors will start investing in European bonds at increased profits. This will further strengthen the euro against the yuan.
So what does China do after all these changes have happened? Well, they will try to find another country to import from at lower prices. As a result, the flow of money to the eurozone decreases and eventually the euro will fall.
Volatility and Dynamics
According to this scenario, it seems that there is no stability whatsoever. That is true and that is why the forex market is so dynamic and volatile. As you see, power relations change. If you want to keep a pulse on how money flows and which currencies are getting stronger or weaker, you will use economic indicators to help you decide when and whichcurrency pair to buy or sell.
Are there safe-haven currencies at all? Yes. For instance, the US dollar, the Swiss franc, and the Japanese yen. When there is global economic uncertainty big investors turn to safe destinations. Since the US, Swiss, and Japanese economies are considered the safest, their currencies are going strong.
The Flow of Money
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